Auto-Insurance Changes = Big Savings

Jun 16, 2007

By Kimberly Lankford Kiplinger's Personal Finance

Auto insurers are making big changes in the way they price policies, and that can mean big savings for you.

In the past, most insurers based premiums on only a handful of variables -- type of car, place of residence, age, marital status and driving record. Now they focus on 30 or more factors. "I predict that the 14 companies I work with will all change their pricing within the next few years," says Tom Minkler, an independent agent in Keene, N.H.

For example, insurers have found a strong correlation between credit history and insurance claims, and they have been taking credit history into account for some time in states where it's legal. Now they're studying credit reports in even more detail, noting, for example, if you've made payments 30 or 60 days late.

Because they now have the computing power to pinpoint risk and match it to specific prices, insurers no longer have to cram a variety of people into a wide pricing tier. Allstate used to use just seven pricing tiers; it has now expanded that number to 384. As a result, drivers with the best records have seen their rates drop as much as 25 percent. "If you're a better driver, your rates are likely to fall because the subsidies that you've provided to worse drivers will be reduced," says Bob Hartwig, president of the Insurance Information Institute.

But even people with poor driving records are likely to benefit. In the past, drivers with multiple accidents or major violations were relegated to high-risk insurers that charged hefty premiums because mainstream companies didn't have a system for pricing high- risk policies. Now mainstream companies are offering to cover riskier drivers, often at lower rates than those of high-risk insurers.

What does all this mean to you? The company that offered you the lowest price under the old rules may no longer have the best deal. Even under the new pricing structures, "the difference in premiums can be several hundred dollars," says Minkler.

You may benefit from working with an agent to find the best price. You can find an agent in your area through www.iiaba.net; also contact agents who sell for a single company, such as Allstate or State Farm.

In addition, you may qualify for special programs, such as Allstate's Your Choice Auto. With a record of good driving, you're eligible for discounts: Your deductible is lowered by $100 for every year without an accident (with a maximum reduction of $500), and you get a 5 percent premium discount for every year of accident-free driving, plus a guarantee that your rates won't rise if you have an accident.